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Ireland's banking system and the broader economy have come a long way since the dark days of the financial crisis, with the country regaining access to the international bond markets and the economy returning to growth. However, according to Moody’s, there is still some distance left to run.

In a note this morning, the credit ratings agency said the outlook for the Irish banking system remained negative, although it acknowledged Ireland’s banks have made progress since the bursting of the property bubble, which left the country's banks with huge holes in their balance sheets.

In its most recent review mission to Ireland late last year, the European Commission, the European Central Bank and the IMF noted that the country was making progress, with the country’s authorities ramping up reforms to restore the health of the Irish financial sector.

On the banking side, balance sheets have been cleaned up with the transfer of loss-making real estate portfolios to the National Asset Management Agency, a government-owned special purpose vehicle. The Bank of Ireland has even attracted foreign investors as confidence has returned.

The economy has also helped, returning to growth, while Irish sovereign bonds have rallied. Sovereign bonds maturing in 2020 rose in price by around 22% in 2012, according to the Irish Stock Exchange. In November, Bank of Ireland also sold the first covered bond without a government guarantee in over three years. A bond deal earlier this month saw orders of more than €7bn for a €2.5bn bond sale.

However, Moody’s said there is still more to do, and kept a “negative outlook” for the country’s banks – which include Bank of Ireland, Allied Irish Bank and Ulster Bank Ireland – arguing they still face ongoing asset-quality deterioration, a high level of dependence on funding from the European Central Bank, and continuing weak profitability.

It said: "We believe that it will take the banks several more years to fully resolve the legacy issues from the crisis; as such, asset quality will remain weak. Although the vast bulk of the land and development loans were transferred to Nama, arrears remain high on the remaining property exposures.

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"The asset quality of the banks' residential mortgage books will also remain very weak, although we recognise that increases in arrears are beginning to slow."

The note added that ongoing liquidity support from the ECB remained vital, and that profitability across the sector was likely to remain negative or low, due to the sustained high level of provisions, high funding costs, lower revenues due to muted demand, and a high proportion of low-yielding tracker mortgages tied to ECB rates.